Ms. Candice Yong Mr. Markus Poh
Legal Associate (Corporate Practice) Legal Associate (Corporate Practice)
T: (65) 6322 2230 T: (65) 6322 2217
F: (65) 6534 0833 F: (65) 6534 0833
E: candiceyong@loopartners.com.sg E: markuspoh@loopartners.com.sg
Loo & Partners LLP
143 Cecil Street, Level Ten, GB Building
Singapore 069542
www.loopartners.com.sg
On 15 November 2012, the Securities and Futures (Amendment) Act 2012 was passed by Parliament, giving effect to policy proposals, among others, relating to regulation of over-the-counter (“OTC”) derivatives.
Subsequently on 1 July 2015, the Monetary Authority of Singapore (“MAS”) issued a Consultation Paper on Draft Regulations for Mandatory Clearing of Derivatives Contracts, as part of the ongoing development of the regulatory regime concerning OTC derivatives.
The proposed draft Securities and Futures (Clearing of Derivatives Contracts) Regulations (the “Regulations”) are in line with the G20 objectives and Financial Stability Board recommendations on OTC derivatives, and will give effect to Part VIB of the Securities and Futures Act (Chapter 289) of Singapore (the “SFA”) on the clearing of derivative contracts.
This update highlights the key policy considerations on the mandatory clearing regime.
Types of OTC derivative contracts to be cleared
MAS proposes that at minimum, Singapore dollar fixed-to-floating SOR interest rate swaps (“IRS”) and US dollar fixed-to-floating LIBOR IRS will be subject to clearing requirements. They are the most liquid IRS traded in Singapore and comprise about 50% of gross notional amount of IRS trades booked in Singapore. IRS in turn constitute more than 90% of interest rate derivative contracts booked in Singapore. The clearing of IRS is thus expected to significantly reduce systemic risks in the Singapore financial system. IRS are also highly standardised contracts and pose minimal operational concerns for clearing.
MAS is considering a wider range of products (in particular, IRS denominated in Euro, Pound Sterling and Japanese Yen) to be subjected to clearing obligations, with the intention of achieving margining efficiencies for market participants.
Circumstances under which clearing is mandatory
Following from above, MAS further notes that IRS are predominantly traded in Singapore by local banks and local branches of foreign banks. Thus MAS proposes subjecting transactions that are booked in the Singapore-based operations of both transacting counterparties, i.e. a Singapore-incorporated company or a Singapore branch of a foreign entity, to clearing obligations. This approach addresses trades whose risks reside in Singapore, and avoids potentially creating conflicting requirements with foreign jurisdictions should they commence mandatory clearing obligations.
Persons subject to or exempt from clearing obligations
At this stage, the proposed Regulations only subject banks licensed under the Banking Act (Chapter 19) of Singapore whose gross notional amount of outstanding derivatives contracts booked in Singapore exceed the maximum threshold of S$20 billion for each of the last four calendar quarters to clearing obligations. This would address the largest counterparty credit risks in Singapore’s OTC derivative markets.
Other financial institutions which are “specified persons” under section 129B of the SFA will not be subject to mandatory clearing obligations at this stage. MAS also proposes to exempt intra-group transactions and public bodies from the scope of clearing obligations.
MAS intends to issue the Regulations by the end of 2015, and has indicated that it will provide at least six months’ notice before the clearing obligations take effect. Upon finalisation of the proposed Regulations, the affected banks should keep a close watch on the date on which they come into effect.